Banks borrow more from Fed, investment firms less

The Fed on Thursday said commercial banks averaged nearly $65 billion in daily borrowing over the week ending Wednesday. That was up from $61.6 billion in average daily borrowing logged over the week that ended Jan. 21.

Investment firms drew $32 billion over the past week. That was down from an average of nearly $32.7 billion the previous week. This category includes any loans that were made to the U.S.- and London-based broker-dealer subsidiaries of Goldman Sachs, Morgan Stanley and Bank of America Corp.'s Merrill Lynch.

The Fed's net holdings of "commercial paper" averaged $316.2 billion over the week ending Wednesday, a decrease of $33.7 billion from the previous week. Under the first-of-its-kind program started Oct. 27, the Fed is buying commercial paper – the crucial short-term debt that companies use to pay everyday expenses. The Fed has said about $1.3 trillion worth of commercial paper would qualify.

The Fed also said its purchases of mortgage-backed securities guaranteed by Fannie Mae, Freddie Mac and Ginnie Mae were valued at $7.4 billion as of Wednesday, up from nearly $6 billion last week. The goal of the program, which started on Jan. 5, is to help the crippled mortgage-finance and housing markets. Mortgage rates have dropped since the Fed announced the creation of the $500 billion program late last year.

Squeezed banks and investment firms are borrowing from the Fed because they can't get money elsewhere. Investors have cut them off and shifted their money into safer Treasury securities. Financial institutions are hoarding whatever cash they have, rather than lending it to each other or customers. The lockup in lending has contributed to the recession, now in its second year.

Investment houses last March were given similar emergency-loan privileges as commercial banks after a run on Bear Stearns pushed what was the nation's fifth-largest investment bank to the brink of bankruptcy and into a takeover by JPMorgan Chase.

The identities of commercial banks and investment houses that borrow are not released. Commercial banks and investment companies now pay just 0.50 percent in interest for the emergency loans.

Critics worry the Fed's actions have put billions of taxpayers' dollars at risk.

The Fed also provided updated valuations on the assets it is holding because of last year's bailout of Bear Stearns and insurer American International Group.

The Fed's Bear Stearns' portfolio is now valued at $25.7 billion, down from $27 billion as of Sept. 30. The Fed's AIG assets include one portfolio valued at nearly $19 billion of residential mortgage-backed securities, down from nearly $20 billion in mid-December. The Fed's second AIG portfolio of collateralized debt obligations, which are complex financial instruments that combine various slices of debt, is now valued at $27.5 billion, up from nearly $27 billion in late November.

The Fed's balance sheet now stands at $1.99 trillion. Although that's down from last week's $2.05 trillion, the central bank's balance sheet has mushroomed from just under $900 billion in September. That growth reflects the Fed's many unconventional efforts – various programs to lend or buy debt – to mend the financial system and jolt the economy out of recession.

The report also said that AIG's loan from the Fed averaged $38.3 billion for the week ending Wednesday, little changed from $38.4 billion averaged in the previous week.